EU Should Set Deadline for Ending Bank Guarantees, Bruegel Says

The European Union should set a deadline for member states to withdraw credit guarantees for banks to spur them to raise new capital and write off bad loans, the Bruegel research group said.

“Bank recapitalization and restructuring should be completed in all EU countries as a matter of urgency,” the Brussels-based institute said today in a report on post- crisis exit strategies. To encourage this, governments should “agree on a timetable and firm deadlines for termination of government guarantees.”

The recommendation was directed at the bloc’s 27 finance ministers, who are discussing the health of European banks at a meeting in Gothenburg, Sweden. The ministers are considering a report from their banking supervisors that assesses the readiness of the region’s banks to withstand economic and financial stresses.

U.S. banks have moved more quickly to write off bad debts and raise new capital, some bank analysts say. U.S. financial institutions have reported $1.08 trillion in losses in the wake of the credit crunch, more than twice the $498 billion posted by their European counterparts, according to Bloomberg data.

U.S. regulators found earlier this year that 10 financial companies led by Bank of America Corp. needed to raise a total of $74.6 billion of capital, in results made public on May 8. Releasing the findings helped calm investors, U.S. Comptroller of the Currency John Dugan, who oversees national banks, said at the time.

‘Bad Banks’

In Europe, programs to establish “bad banks” to hold impaired assets are still in the early stages, the International Monetary Fund said yesterday.

The report EU finance ministers are considering today comes from the Committee of European Banking Supervisors. Results haven’t been released.

The tests, the second devised by CEBS this year, seek to assess risks in the market, rather than determine capital needs, in contrast to the U.S. program completed in May. Still, national authorities may order banks to top up capital, in part to meet commitments made by Group of 20 leaders last week in Pittsburgh.

The G-20, which includes the EU’s Britain, France, Germany and Italy, committed last week to conducting “robust, transparent stress tests as needed” and called on banks to retain a greater portion of current profits to bolster capital.

To contact the reporter on this story: Mark Deen in Islamabad at markdeen@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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